Commentary

We do not have official Macro figures for the third quarter but we predict that they will be worse than we witnessed in the first half of 2020. In the first half of the year the Israeli government received a high score for its initial handling of the Covid 19 crisis.  In the third quarter of the year there is no doubt that the handling of the “second wave” of the pandemic can be best defined as a failure.

Recently published data from the Bank of Israel (BoI) shows that the total surplus in capital inflows into the economy (direct and financial investments) in the first half of 2020 amounted to US$13.5bn, following a surplus of US$3.8bn in 2019. As long as the scope of investments will continue at the current pace, it appears that 2020 will conclude with a substantial surplus in capital inflows. The figures reflect confidence in the Israeli economy, despite the crisis. This development, together with additional factors, such as the continuing surplus in the current account of the balance of payments and Israel’s entrance into the World Government Bond Index (WGBI), represent factors that will support the strength of the shekel in the remainder of the year.

As is well-known, the coronavirus pandemic has led to a sharp drop in economic activity within the Israeli economy, as well as in most of the economies of the world. The data on the cumulative decline in activity in the first half of 2020 represents a good index for analysing the degree of damage to the different economies. Until recently, 27 of the 37 countries in the OECD have published data on economic growth in the first two quarters of 2020. In the Israeli economy the growth rates in the first two quarters (each quarter compared to its preceding quarter) amounted to a cumulative decline in the GDP of 9.7%. This places Israel among the upper third of the countries that have published data (meaning that two-thirds of the countries experienced more severe economic damage).

Stock in Focus

Telsys – (Traded on the TASE, Ticker TLSY)

In this month’s report we would like to give an update regarding Telsys, a holding that we have described in previous monthly reports. Telsys is Israel’s largest distributor of electronic components. The company focuses on semiconductors, subsystems, passives, connectors, microwaves, telecom/datacom products and more. Telsys’ customers use the technology in the components it supplies to design and manufacture products in various different branches of the high-tech industry: defence, medical, industrial, telecom, security and more.

What we consider as the “hidden gem” with this investment, is a company that Telsys holds by the name of Variscite.  Telsys holds around 68% of this company, which develops, designs and manufactures high-quality System on Modules (SoM). Variscite is the leading ARM-based SoM vendor, servicing thousands of satisfied customers worldwide, targeting numerous embedded end products and applications. This is a company that has grown sharply in recent years (over 30% per year), and has sales of around $100 million USD in a market which is estimated at $3 billion USD. Variscite earns around $22 million USD per year and is valued on a PE multiplier of 10, which in our opinion does not represent the potential growth of the company. In our opinion, the main reason for the low price is that there is no focus or broker coverage of the company.

Our estimates are that in the near future Telsys will prompt a spinoff of Variscite and pursue an IPO for the company either in Israel or on the Nasdaq.